Accounting firm CEOs: review the financial reporting environment.

• Author: Heffes, Ellen M.
• Position: FinancialREPORTING

Establishment of the Securities Act and the U.S. Securities and Exchange Commission in 1933-4 sparked the beginning of the regulated audit, to help protect average people--the investors--and not the companies. The auditing profession has gone through much change, including the establishment of the Public Company Accounting Oversight Board (PCAOB), in response to the Sarbanes-Oxley Act of 2002. The PCAOB now regulates the audit firms in lieu of prior self-regulation, and dictates which services they can perform for clients.

As a special report for FEI's 75th anniversary, Executive Editor Ellen M. Heffes spoke with the current CEOs of the largest U.S. audit firms about their perspectives on changes in the nature of the relationships between their firms and CFOs. They were also asked to discuss significant changes in the profession, how they view the changes and what they expect in the future.

Each of the large audit firm CEOs has gone through the ranks--starting in audit and moving up the ladder to become the chiefs of their firms. So, they speak from their personal history and much quality experience.

Timothy P. Flynn, Chairman and Chief Executive, KPMG

There are some fundamental principles that have always existed in the relationship with the CFO and the auditing partner or audit firm. One is that they both have an aligned interest in getting it right. And the second is they both have a responsibility to the shareholders of the business [and] the capital markets to do their job in a professional way.

Clearly, Sarbanes-Oxley and some of the changes that took place in the environment in 2002 caused all to look at the relationship and make sure that there was a proper independence and the proper healthy skepticism on the part of all the parties involved. It took some time to work through that changed environment. We've always had a great relationship based on mutual trust with the CFO. As things evolved over 2002-04, that trust never wavered, but auditors had to bring a healthy degree of skepticism to the job. The relationship is still based on trust, but it is now what I would call "trust and verify. I trust you, but my job requires that I verify this fact."

As a profession, there was a time when we might have relied more on representations made by CFOs ... Today's "healthy degree of skepticism" may have put some short-term stress on the relationship, [yet] it has never impacted the mutual respect and trust that both parties have for the rules and responsibilities and the need to have the right level of independence.

There have been a lot of changes in business in the last 25 plus years that have impacted the roles of the auditing firm and the CFO, and we've worked together to tackle those changes and strengthen the roles we have in organizations. We now work for the audit committee, and with the CFO and management. This is a change in mindset brought about by regulatory change. There's no question about it.

Businesses have gone through different stages, and more complexity in accounting regulations has increased the need to have good, strong communications. As globalization and more decentralization of business have happened [along with] a stronger need for full internal control environments, there has been an even greater need...